W H I T E P A P E R

Mapping Your Way to ComplianceBy James Sloan, Senior Product Market Manager, Wolters Kluwer Financial ServicesSteven Schult, Product Manager, Wolters Kluwer Financial ServicesMindy Marchetti, Associate Product Manager, Wolters Kluwer Financial Services

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Mapping Your Way to Compliance

Within the past few years, mapping has become a more complex requirement for banks. When HMDA, CRA and Fair Lending regulations were written over thirty years ago, most geographic mapping was done on wall maps with pushpins. Since then, mapping tools have become more sophisticated and easier to use—causing them to become a critical piece of consumer compliance. Regulators are using maps to analyze and enforce compliance on issues of HMDA, CRA and Fair Lending. Additionally, some of the most sophisticated financial institutions are using mapping technology to improve their performance and mitigate compliance risk.

Mapping Is Not an Option... It Is a Requirement

According to the Community Reinvestment Act, each regulated financial institution must keep a public file in at least one branch in each state containing key information about their CRA obligations. Specifically, section 345.43 (a).(6) states:

A map of each assessment area showing the boundaries of the area and identifying the geographies contained within the area, either on the map or in a separate list.

For most institutions this means they must create a few copies of a few MSAs for each public file.

However, for larger, multi-state institutions, this process can be cumbersome and time consuming. Some institutions may have to create up to 50 copies of over 300 individual maps that need to be updated whenever assessment area boundaries are altered.

The use of mapping has also been increasing among those examining Fair Lending compliance. This has largely been driven by a few key redlining settlements in recent years. Internal compliance officers are now looking to exhibit the main areas of fair lending risk, and there is no more evident way of doing this than with a clear visual map. This applies to every sort of banking activity including mortgage lending, other consumer lending, branch and ATM locations and loan modifications.

For CRA, a Map Is Worth a Thousand Words

In addition to the public file requirement, the Federal Reserve’s Consumer Compliance Handbook outlines the role of maps in a CRA

exam—as a way for the examiner to understand an institution’s geographic profile:

Assess infrastructural and geographic characteristics within the assessment area. This includes a review of maps; natural areas; major thoroughfares; access to public transportation; locations of low- and moderate-income census tracts; names of specific low- and moderateincome neighborhoods; and proximity of the assessment area to military bases, airport facilities, and metropolitan centers. Internal mapping software; information from the financial institution; and information from local planning, transportation, economic development, or real estate boards are good sources for possible information.

Controlling Your Story: Exams

For banks, advance preparation and detailed assessment area maps are methods that enable the institution to guide the examiner through the process and control the story. The specific reference to proximity to military bases, airport facilities and metropolitan centers highlights the potential for certain geographic landmarks to alter your lending performance. An excellent example of this is in San Mateo County, CA, as pictured in Figure 1.

This map illustrates a series of cemeteries that occupy a substantial portion of middle-income tracts in this county. During a CRA exam, it is common for questions around lending gaps in low- and moderate-income tracts and geographic factors such as cemeteries, military bases, airports and Native American reservations to contribute to the story around an institution’s CRA performance.

Standard Performance Context Maps

In order to prepare your performance context, you must illustrate the environment in which you are lending, A variety of maps, ranging in complexity, can be created to reveal the market conditions within the assessment areas for which an institution is responsible. For example, a map could be generated for an assessment area with the region shaded by key demographic indicators such as ‘Income as a Percent of MSA Median’ or ‘Percent Minority Population’. This simple map can provide an institution with a visual representation of the income and minority distribution in the market it serves.

More Data = Clearer Picture

Once an institution has an understanding of the base market conditions in the assessment area(s) they serve, their initial assessment area map can be enhanced with additional data sets and map layers to provide a more complete picture of its lending performance within the region. As referenced previously, important land use layers to consider would include airports, cemeteries, federal land, military institutions, state parks and national parks. Visualizing these layers in an assessment area is vital to understanding an institution’s market as they represent potentially large areas of land where lending is limited, if not impossible.

To view an institution’s lending distribution in its assessment area, it is a good business practice to map loan activity on your base assessment area map with demographic variables applied. For example, if the institution first shaded the census tracts in its assessment area based on ‘Income as a Percent of MSA Median’ levels and then applied their year-to-date mortgage loans to the map, they will see a very clear picture of their lending distribution amongst low- and moderate-income census tracts. This spatial view also allows an institution to identify specific lowand moderate-income census tracts where it needs to increase its penetration. These census tracts could then be targeted for future marketing campaigns or filled by purchasing CRA eligible loans on the secondary market.

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Figure 1: San Mateo County Cemeteries

Figure 2: Sample Performance Context Map for Los Angeles County

More advanced market analytics can be achieved by applying additional data sets such as Peer Mortgage or Small Business lending data to the map. The addition of Peer Mortgage data will provide the institution, and its examiners, with a more complete picture of the institution’s performance within the assessment area as compared to that of its peers. A sample of this type of map can be seen in Figure 2.

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Mapping Your Way to Compliance

Branch Mapping for the CRA Service Test

According to the CRA regulation, the Service Test will take into consideration the following (emphasis added):

1. The current distribution of the bank’s branches among low-, moderate-, middle-, and upper-income geographies

2. In the context of its current distribution of the bank’s branches, the bank’s record of opening and closing branches, particularly branches located in low- or moderate-income geographies or primarily serving low-or moderate-income individuals

The most straightforward way of analyzing your branch locations is by geocoding the addresses and identifying those that are located within the boundaries of a low- or moderate-income tract. However, in the last few years many institutions have identified several branches that are not physically located within low- or moderate-income tracts boundaries, but that still primarily serve low- or moderate-income

individuals. In order to prepare for an exam and advocate for credit on the service test, you must create maps that show the service area of a branch location. In Figure 3, circles of a .5 mile radius have been drawn around each branch location in order to demonstrate the service area of a location. For Branch 1 and Branch 2 you would typically not receive credit on the Service Test because neither lies within low- or moderate-income tract boundaries. However, by using these maps, you can make an argument that a substantial portion of the service areas encompass moderateincome tracts and should therefore be considered as serving low- or moderate-income individuals. This can be enhanced by including population counts of low- and moderate-income families within the service area of a particular branch location.

Figure 3: Branch Locations in Cook County

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Spatial Void Hypothesis

Similar research has been done utilizing maps by both Fannie Mae and the Philadelphia Federal Reserve to identify spatial gaps in traditional bank services and the correlation with check cashing or other non-traditional financial services. Known as the “Spatial Void Hypothesis,” it states that high patronage of the non-traditional financial industry by minority and low-income households is due to the absence of mainstream financial institutions in the area. Using maps of bank branch locations, they found a positive correlation between the absence of bank branches and the presence of alternative financial services. This presents a stronger argument for the need for a traditional banking presence in low- and moderate-income tracts.

Fair Lending: What Does It Mean Today?The Department of Justice is leveraging maps to highlight fair lending concerns. These maps are included in their cases to visually represent lenders’ activities and branch locations, making the gaps that much more identifiable and infallible. Any institution that creates redlining maps should understand the DOJ’s current focus.

What are the regulators mapping?

In 2011, two new redlining settlements provided lenders examples of how the DOJ will leverage maps. The following maps were used in the settlements:

■n A basic reference map for each Assessment Area or MSA showing the percentage of minority population levels by census tract

■n A map of the branch locations by MSA also showing the percentage of minority population

■n A map showing the location of each application broken out by the year of the application

■n A map showing the location of each origination broken out by the year of the origination

To perform a similar analysis, lenders can perform the same analysis on their own branch locations and activities to ensure they are following the letter of the law.

Deconstructing the DOJ Fair Lending Maps

Certain elements are consistent across each of the recent DOJ redlining maps and should be considered by lenders when creating their own maps.

The zoom level for maps is critical. One of the recent complaints indicated that the assessment area “formed a virtual horseshoe around and excluded most majority-black census tracts in the City of Detroit.” If choosing not to take an entire city, county, or MSA as an assessment area, banks should have a clearly defined reason. Ensure surrounding areas that may be excluded are shown on the map and that no peculiarities are present in relation to the excluded areas demographics.

A separate map should be built for applications and originations, to answer two questions.

1. Are you taking applications in majority-minority areas?

2. If you are taking applications, is there an underwriting issue?

If any loans can be determined to be subprime or higher risk products, those loans should be identified in a different color. This will highlight if you have a pricing or steering issue based on geographic location.

Maps should contain branch locations as well, identified in a different color and symbol from the applications. If branch locations do not service majority-minority tracts, this could be determined to be a race-based pattern of locating or acquiring branch offices. One potential addition to this map is a radius—this will help to demonstrate whether each branch services majority-minority tracts.

Common elements on the maps themselves include assessment area, county, city, and census tract boundaries. Bodies of water are included for a reference, and counties are typically labeled. In both of the 2011 complaints, “Percent Black,” denoting the percent of Black or African American individuals in each census tract, was the shading used, with 4 equal ranges used (0%-25%, 25%-50%, 50%-75%, and 75%-100%). This group has appeared in DOJ redlining maps and cases—so depending on the demographics of your lending area, it may be prudent to use this shading rather than Percent Minority.

Transitioning from 2000 to 2010 Census for Fair Lending

With the release of 2010 US Census Data, the areas that have been considered low minority before may have changed. Creating maps of lending areas in both boundaries, with minority tract level shading and comparing side-by-side, can help identify any tract shifts that could create a redlining concern where one was previously not present.

Time Interval MappingThe concept of time interval mapping may be new to some. It involves the ability to select a data set for which you wish to analyze the lending distribution over a period of time. For those involved in CRA and HMDA compliance, the simplest way to think about this functionality would be the ability to select specific time periods for which you could view the activity in your annual HMDA or Small Business LAR.

With new mapping technology, you can create interactive maps that allow analysts to view data in the context of a moving time period. The slider bar below demonstrates how this would be implemented in the context of a software solution that analyzes the action date field of an LAR and allows you to show the progression of your activity over the course of the year.

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Mapping Your Way to Compliance

Time Interval MappingThe concept of time interval mapping may be new to some. It involves the ability to select a data set for which you wish to analyze the lending distribution over a period of time. For those involved in CRA and HMDA compliance, the simplest way to think about this functionality would be the ability to select specific time periods for which you could view the activity in your annual HMDA or Small Business LAR.

With new mapping technology, you can create interactive maps that allow analysts to view data in the context of a moving time period. The slider bar below demonstrates how this would be implemented in the context of a software solution that analyzes the action date field of an LAR and allows you to show the progression of your activity over the course of the year.

The business applications for this technology within the realm of CRA and HMDA compliance are numerous. This functionality provides compliance personnel and data analysts the ability to view the spatial distribution of data over various time periods and allows data analysts to analyze cross sections of data on their map.

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Color Can Enhance Your View Color Can Enhance Your View

A practical use for time interval mapping would be the ability to examine trends in your institution’s foreclosure data as compared to national foreclosure data. To create a base map for this analysis, the Neighborhood Stabilization Program (NSP) data published by the U.S. Department of Housing and Urban Development (HUD) could be used to shade census tracts in your area of analysis based on the presence of foreclosures.

To most effectively present this data on your map a ranged color palette can be applied to display areas where darker colors represent a higher density of foreclosures and lighter colors represent lower density of foreclosures. The application of a varied color palette to these areas will provide your institution a very clear picture of which census tracts have experienced higher foreclosure rates overall.

With a clear picture of national trends in your region, a next step would be to apply your institution’s foreclosure data to the map. While there is value to plotting an entire year’s worth of data, your analysis can be refined by plotting this data using a time interval mapping solution.

Seeing the data gradually display over a period of time as you move the slider bar can help tell the story behind the data. Sudden surges in activity or clusters around a time period may relate to other variables that need to be further explored or explained.

Color Can Enhance Your View Color Can Enhance Your View

As seen in Figures 4 and 5, this data can be compared with national foreclosure data, at the census tract level, to identify whether your institution’s foreclosure activity corresponds to foreclosures reported at the national level.

The area of analysis is Las Vegas, NV, where according to statistics published by RealityTrac, one out of every 181 home received a foreclosure filing in January of 2012. The maps above demonstrate the power and potential of time interval mapping. We can see the census tracts where with the highest density of foreclosures just north and south of the downtown area directly correspond to the areas where foreclosure rates were at their highest in the national data. This data will provide important source of performance context information.

A Picture Is Worth a Thousand WordsThe use of maps in the analysis of an institution’s compliance program is gaining a more consistent presence in risk mitigation, compliance examinations and DOJ referrals. With the increased scrutiny that regulators are applying in the current regulatory environment, financial institutions must use all the tools at their disposal to explain their performance to both internal and external stakeholders. As they say, “A picture is worth a thousand words,” and as we have seen in recent settlements, the right map can be worth millions.

Figure 4: 2011 Foreclosures, January – March Figure 5: 2011 Foreclosures, January – September

About Wolters Kluwer Financial Services

Whether complying with regulatory requirements or managing financial transactions, addressing a single key risk, or working toward a holistic enterprise risk management strategy, Wolters Kluwer Financial Services works with customers worldwide to help them successfully navigate regulatory complexity, optimize risk and financial performance, and manage data to support critical decisions. Wolters Kluwer Financial Services provides risk management, compliance, finance and audit solutions that help financial organizations improve efficiency and effectiveness across their enterprise. With more than 30 offices in 20 countries, the company’s prominent brands include: AppOne®, AuthenticWeb™, Bankers Systems®, Capital Changes, CASH Suite™, GainsKeeper®, NILS®, OneSumX®, TeamMate®, Uniform Forms™, VMP® Mortgage Solutions and Wiz®. Wolters Kluwer Financial Services is part of Wolters Kluwer, which had 2014 annual revenues of €3.7 billion ($4.9 billion), employs 19,000 employees worldwide, and maintains operations in over 40 countries across Europe, North America, Asia Pacific, and Latin America. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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